I wouldn’t trade the U.S. dollar for the structurally flawed euro, at least not yet, but I would gladly trade Ben Bernanke for the more vigilant European Central Bank (ECB) President Jean-Claude Trichet. Take a look at the contrasting views on inflation in the statements below. It should be clear after reading this post which central banker would make a better custodian of the value of the dollar.
The first is from Bernanke’s prepared remarks in the Fed’s semi-annual monetary policy report to Congress. Emphasis is mine.
The rate of pass-through from commodity price increases to broad indexes of U.S. consumer prices has been quite low in recent decades, partly reflecting the relatively small weight of materials inputs in total production costs as well as the stability of longer-term inflation expectations. Currently, the cost pressures from higher commodity prices are also being offset by the stability in unit labor costs. Thus, the most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation–an outlook consistent with the projections of both FOMC participants and most private forecasters. That said, sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored. We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability.
Sounds like Ben B. doesn’t think rising commodity prices will be passed through to consumer prices. If he’s wrong, the Fed will end up behind the inflation curve. With a flood of liquidity already in the system, the prudent action for the Fed would be to take commodity price increases more seriously. The next statement is from Trichet’s opening remarks at the press conference following the ECB’s March 3rd meeting. Emphasis is again mine.
To sum up, the Governing Council decided to leave the key ECB interest rates unchanged. The information which has become available since our meeting on 3 February 2011 indicates a rise in inflation, largely reflecting higher commodity prices. The economic analysis indicates that risks to the outlook for price developments are on the upside, while the cross-check with the monetary analysis indicates that the underlying pace of monetary expansion remains moderate. Recent economic data confirm that the underlying momentum of economic activity in the euro area remains positive; however, uncertainty remains elevated. The current very accommodative stance of monetary policy lends considerable support to economic activity. It is essential that the recent rise in inflation does not give rise to broad-based inflationary pressures over the medium term. Strong vigilance is warranted with a view to containing upside risks to price stability. Overall, the Governing Council remains prepared to act in a firm and timely manner to ensure that upside risks to price stability over the medium term do not materialise. The continued firm anchoring of inflation expectations is of the essence.
You have to give Trichet and the ECB credit for this. The Euro-area’s debt problems have not been resolved, but the central bank is more concerned with price stability than the economic impact of a potential sovereign debt crisis. Financial markets have priced in an interest rate hike at the next ECB meeting. Ben B. could learn a thing or two from his European counterparts.
Jeremy Jones, CFA
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